TEXT-Fitch rates Norddeutsche Landesbank Girozentrale
(The following statement was released by the rating agency)
Oct 17 - Fitch Ratings has assigned Norddeutsche Landesbank Girozentrale's (NORD/LB; 'A'/Stable/'F1') USD1bn public sector Pfandbrief a 'AAA' rating with Stable Outlook. The Pfandbrief is issued with a fixed coupon and has a final maturity in October 2015. Fitch has also affirmed the remaining outstanding Pfandbriefe, totalling EUR18.18bn, at 'AAA' with a Stable Outlook. The rating is based on NORD/LB's Long-term Issuer Default Rating (IDR) of 'A', the Discontinuity Cap (D-Cap) of 5 (low risk) and the overcollateralisation (OC) that Fitch takes into account in it analysis, which is currently 25.1%. In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by three or more notches to 'BBB' or lower; or (ii) the D-Cap fell by three or more categories to 2 (high risk) or lower; or (iii) the OC that Fitch considers in its analysis dropped below Fitch's 'AAA' breakeven level of 13.4%. The agency takes into account the lowest OC of the past year in its analysis, reflecting the issuer's Short-term IDR of 'F1'. The level of OC Fitch relies upon supports a 'AAA rating on a probability of default (PD) basis. The D-Cap of 5 (low risk) results from a low risk assessment for the asset segregation, the liquidity gap and systemic risk and the cover pool-specific alternative management components. A very low risk assessment was assessed for the systemic alternative management and privileged derivatives components. The low risk assessment for asset segregation and the very low risk for systemic alternative management risk component is in line with all German Pfandbriefe programmes (see 'Fitch Assigns German Programmes Outlooks & D-Caps; Puts 3 German Pfandbriefe on RWN', dated 11 September 2012 at www.fitchratings.com). The public sector nature of the cover pool primarily supports the low discontinuity risk assessments due to the greater degree of expected liquidity and ease of management of public sector assets compared to mortgage loans. The programme does not have registered derivatives in the cover pool. The Fitch breakeven 'AAA' OC level of 13.4% for the covered bond rating is lower than Fitch's previous supporting OC of 15.7%, which related to a covered bonds rating of 'AAA' on a PD basis. Following the publication of its revised covered bonds rating criteria, the agency now communicates the breakeven OC to maintain the covered bonds rating rather than to maintain the current rating on a PD basis plus recovery uplift. The main contributors to the 'AAA' breakeven OC are the significant open FX rate positions. The open position in USD further increased as a consequence of the USD1bn issuance as only around 0.8% of the cover assets are USD-denominated. In total the open positions in USD, Swiss francs and Japanese yen amount to almost 10%. In contrast the credit risk of the cover assets contributes only a minor portion to the 'AAA' breakeven OC. The Pfandbriefe's rating is also credit-linked to Germany's 'AAA' rating, as around 64% of the cover pool is directly exposed to or guaranteed by the German sovereign and federal states. Fitch has taken all mismatches into account in modeling the expected cash flows by applying appropriate stress assumptions. Fitch will monitor the key characteristics of the cover assets and outstanding Pfandbriefe on an on-going basis, and check whether the OC taken into account in its analysis provides protection commensurate with the rating. The Fitch breakeven OC for the Pfandbrief rating will be affected by, amongst other factors, the profile of the cover assets relative to outstanding Pfandbriefe, which can change over time, even in the absence of new issuance. Therefore, the breakeven OC to maintain the Pfandbrief rating cannot be assumed to remain stable over time. Fitch has published an exposure draft outlining a number of enhancements to its asset analysis criteria for public sector covered bonds (see 'Fitch: Exposure Draft: Asset Analysis Criteria for Covered Bonds and CDOs of European Public Entities' dated 10 October 2012 at www.fitchratings.com). If fully implemented, Fitch expects that the current rating could be maintained but potentially on the basis of higher breakeven OC levels. (Caryn Trokie, New York Ratings Unit)
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